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EDUC Could Create Value By Efficiency

|Includes: Educational Development Corporation (EDUC)

At the first sight it looked like a boring publishing company which prints and sells books. After some research i found that article about EDUC:

And it got my attention. EDUC isn't as boring as it might seem. Do you know tupperware? They distribute their entire product line through Multilevelmarketing homeseller. EDUC does it the same way. They call it UBAM (Usborne Books & More) which represents about 83% of their revenues. The other 17% are direct distribution to book stores like Barnes & Noble, which is the largest book reseller in the US.

The benefits of multilevelmarketing are that you can set a high mark up on your products which are sold to friends and family. Its a cash generating machine, It's growing exponentially and it scales very fast. Even you don't neet expensive marketing. It's the most effective kind of marketing you can have.

EDUC is only publishing children books. That's a nice niche because parents read books with their children. Showing them pictures and try to educate them. I think it's not the same to show them on an ipad. According to Nielsen Books the Children's book market is growing very fast. The children's print book market increased by about 12% in 2016. And about 11.7% in 2015.

In 2012 EDUC made the decision to stop selling through amazon and to increase their home division . In the following years they've lost about 40% in market cap. Today it looks like a smart move and EDUC does well. They Increased their consultants by 151% in 2016 totalling 11.800. Team leaders increased by 287.5% and so on. Revenue grew by over 150% in the home divison. In total EDUC has increased their Revenues by 66% in 2016.

So, what i also like is the CEO Randall White and his 20% ownership. Also, i like the kind how he talks to investors. Take a look at the Q3 conference call.

Randall White

I mortgaged my house when I got this Company, I will do it again. There is no problem in me being all in, I am all in. If you had breakfast this morning and you had bacon and eggs, well, that chicken was involved, that pig was committed. So I am the big fat pig. I am all in, brother.

Also, he invities investors for private calls. That's the kind of integrity i like.

But how about the challanges? EDUC is growing fast, very fast and it has problems in managing inventory, orders and distribution. Inventory grew by 56% and payables grew by 248%. It's also what my investment case relies on. In 2016 EDUC Invested 24m into real estate to handle that growth. They updated their software and UPS is advising EDUC to increase their efficiency. It may take some time, it might be a hard challange, but if they increase their margins it could be a wonderful cash generating machine.

Lets consider the following: Revenue growth by 30% in 2017 and continue to grow by 10% till 2020 (That's a margin of safety as well). Lets consider that they scale their entire solution up within the next 4 years and increase the efficiency. The net margin rises to 5% which would lead to about 7m in Free cashflow. Representing a discounted P/E of 6x leading to an earnings yield of 17%. And they might still grow and increase their margins. Take a look on herbalife who got a net margin of actually 8%.

So, what's the risk? Multilevelmarketing is very vulnerable. As one of the higher teamleader stops to distribute books the entire team could break up. Which leads to a decrease in revenue. Also, it's possible that EDUC is not able to handle their efficiency problems which would lead to a high growth but low margins. The CEO Randall White is 74 years old. That's a risk as well. Someone whos life depends on the success of a company will try to do the best. Like he says:

[…] the last person who wants to stop the dividend is me because I get most of it.

So, i don't want to miss him as CEO.

Disclosure: I am/we are long NASDAQ:EDUC.